Disrupted Lending Environment Reveals FHA Opportunity

by Sarah Daniels
John Randolph

John Randolph,

Seniors housing owners that stabilized their properties after the pandemic are now faced with a new challenge: a spike in interest rates and a disrupted lending environment. The challenge arrives at a time when many borrowers need capital for maturing loans to escape variable-rate debt or to finance growth. The good news is that loans insured by the Federal Housing Administration (FHA) remain available and are giving eligible borrowers an attractive solution, say Lee Delaveris and John Randolph, seniors housing and healthcare specialists at KeyBank Real Estate Capital.

Available in All Market Cycles
Lee Delaveris, KeyBank

Lee Delaveris,

Among the biggest motivations for seeking an FHA loan is the fact that it provides a fully amortizing term (up to 35 years), which eliminates refinancing risk. “There are many borrowers who have had good, long-term relationships with banks, but those relationships are being disrupted as credit tightens and fatigue sets in from years of loan modifications or extensions stemming from the pandemic,” says Delaveris. “FHA’s programs provide liquidity at all times, and in markets like these especially, the FHA loan programs really shine.”

Flexible, Fixed Rate Capital

FHA loans have fixed interest rates for the term of the loan. These interest rates are typically attractive in any market conditions due to the credit benefits of the FHA mortgage insurance, but with today’s inverted yield curve, the cost of FHA-insured fixed rate debt is roughly 200 basis points lower than conventional floating rate bank debt, according to Delaveris. “Today’s rate environment presents a unique opportunity for borrowers to reduce debt service costs and eliminate continued interest rate risk through the FHA programs,” said Delaveris.

Even with a fixed interest rate, FHA loans have a declining fixed prepayment penalty structure that steps down 1 percent each year. That increasing flexibility allows borrowers to position themselves well to take advantage of lower interest rates in the future through the streamlined refinance and interest rate reduction programs available to FHA borrowers, explained Delaveris and Randolph.

FHA loans do not have financial covenants and are non-recourse. They are also fully assumable, and the KeyBank team has already seen that having this financing in place is often an attractive option for prospective buyers.

Stable Underwriting Criteria

FHA loan parameters remain unchanged: for a standard refinance of a for-profit senior care facility, the loan is constrained to no more than 80 percent loan to value and no less than 1.45x debt service coverage ratio. The Department of Housing and Urban Development (HUD) typically wants to see the proposed loan supported by 12 months of EBITDAR. Recent and forthcoming Medicaid rate increases can be underwritten immediately, but temporary revenue add-ons cannot be included, said Delaveris.

While the underwriting of seniors housing and skilled nursing is evolving across all lenders, Delaveris added, KeyBank has been advising its clients to begin preparing to replace their existing debt with maturities in the next two years. Randolph notes that processing times have improved, and deals are moving through the FHA financing process at a good pace. However, it still takes several months from the time a borrower engages a lender to closing an FHA loan. “Borrowers need to give themselves lead time to explore their alternatives and execute,” cautioned Delaveris.

“KeyBank is a proponent of borrowers seeking an FHA loan regardless of the economic environment because of the numerous positive reasons to do so,” Randolph pointed out. “But if you have a project ready to go now, it’s a compelling time to move forward with FHA.”

This article was written in conjunction with KeyBank Real Estate Capital, a content partner of Seniors Housing Business.

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